Pixel Envy

Written by Nick Heer.

How China Built ‘iPhone City’

David Barboza, New York Times:

The state-of-the-art facility was built several years ago to serve a single global exporter: Apple, now the world’s most valuable company and one of China’s largest retailers.

The well-choreographed customs routine is part of a hidden bounty of perks, tax breaks and subsidies in China that supports the world’s biggest iPhone factory, according to confidential government records reviewed by The New York Times, as well as more than 100 interviews with factory workers, logistics handlers, truck drivers, tax specialists and current and former Apple executives. The package of sweeteners and incentives, worth billions of dollars, is central to the production of the iPhone, Apple’s best-selling and most profitable product.

It all centers on Zhengzhou, a city of six million people in an impoverished region of China. Running at full tilt, the factory here, owned and operated by Apple’s manufacturing partner Foxconn, can produce 500,000 iPhones a day. Locals now refer to Zhengzhou as “iPhone City.”

Barboza replied to a reader’s comment:

About labor costs, you are right about the huge differences. But what fascinates me about China is not just the difference between wages there and in the U.S., but the way the system works in China.

Let me tell you a brief story. When I arrived in China and started visiting factories, I was astounded by the factory system. In eastern and southern China, there were all these factory zones — mile after mile of huge, gated factory complexes with dormitories right next to the production sites. Workers were generally 16 to 24 years old, living in dorm rooms with eight to ten roommates. The ate at the factory canteen, worked 60 to 80 hours a week, and then, after two or three years or so, quit and moved back home with their savings.

It is illegal to work more than 20 hours of overtime a week at a Chinese factory, but very few companies paid any attention to this law. Even Apple’s suppliers had repeatedly violated this, because demand swings can be sharp and the companies would some time go into 24-hour production cycles. Apple has now forced its suppliers to comply with the law. But this type of things persists in many factories. The system was set up to dramatically reduce the cost of manufacturing. And wages, in 2004, when I arrived in China, were generally about 25 cents an hour.

I say all this to explain that this is one part of a system that drives costs down. The government offered cheap land, energy subsidies, overtime violations. There were poor environmental and workplace safety standards. So you shouldn’t just think about the cost of labor, but the entire package of what makes a region or a place competitive. And also other things about the culture. Things have improved dramatically in China over the past decade. The factories have gotten better, the laws are enforced more, and global brands are working harder to comply with the law. But it’s still a pretty dark area, if you visit enough factories.

This article is breathtaking — in terms of the scale of operations required by Apple’s operations — and troubling: while there’s little explanation of labour conditions, Barboza explores the various economic “sweeteners” and tax structures offered to companies like Apple. Cumulatively, it’s pretty clear that Apple cannot upend their manufacturing operations and bring them to the United States, despite political pressure.

I think there’s maybe a way to bring part of the production line to the United States, however, should whole-product imports from China be taxed at rates that would make it economically unviable to retaining the current manufacturing setup. If iPhones are brought to the U.S. in parts and are assembled largely robotically, I could see this being viable from a labour and cost perspective, if only for the American market. It would also allow Apple to circumvent new security restrictions:

Apple has agreed to the government’s request to store more of its local data on Chinese servers. It must also undergo “security audits” on new models of the iPhone before gaining approval to sell the product.

That can’t make Tim Cook very happy.

Barboza’s report contains photography from Gilles Sabrié, who also photographed “iPhone city” last year.